U.S. Markets open in 5 hrs 16 mins

Edited Transcript of ARC earnings conference call or presentation 6-Nov-19 10:00pm GMT

Q3 2019 ARC Document Solutions Inc Earnings Call

WALNUT CREEK Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of ARC Document Solutions Inc earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Stickney

ARC Document Solutions, Inc. - VP of Corporate Communications & IR

* Dilantha Wijesuriya

ARC Document Solutions, Inc. - COO

* Jorge Avalos

ARC Document Solutions, Inc. - CFO

* Suriyakumar Kumarakulasingam

ARC Document Solutions, Inc. - Chairman, CEO & President

================================================================================

Conference Call Participants

================================================================================

* Alan W. Weber

Robotti & Company Advisors, LLC - Research Associate

* Walter M. Schenker

MAZ Capital Advisors, LLC - Principal

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and thank you for standing by. Welcome to the ARC Quarter 3 2019 Earnings Report Conference Call. (Operator Instructions)

I'd now like to today's call over to David Stickney, Vice President, Corporate Communications and Investor Relations. Thank you, David. You may begin.

--------------------------------------------------------------------------------

David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [2]

--------------------------------------------------------------------------------

Thanks, Holly, and welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer. Our third quarter results for 2019 were publicized earlier today in a press release. The press release and other company materials are available from our Investor Relations pages on ARC Document Solutions website at ir.e-arc.com.

Please note that today's call will contain forward-looking statements that fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on information as of today, November 6, 2019, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings. This call will also contain certain references to non-GAAP measures, which are reconciled in today's press release and in our Form 8-K filing.

I'll now turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining us today. ARC continued to face, especially in the third quarter, some market trends similar to those we have seen all year. The net result was declining revenues of our traditional service lines. These results, especially when compared to last year, a year which we considered to be a good one, drove us to reexamine the structure of our operations and the services we offer. The purpose was to identify segments of our business that were underperforming and to remove or reorganize them as required based on our customers' current needs. I'm happy to announce that we were very pleased with the outcome of this exercise. By the end of this year, we will have realized more than $10 million in annualized savings. This ensures the protection of our cash flows and eases the pressure on our margins.

We are well aware that we cannot save our way into success. But it is necessary that we protect our financial health today, so we will have the flexibility and the options to take advantage of the opportunities which may present themselves tomorrow as we move forward.

During this time, I think it's vitally important to keep in mind that our business is not suffering from a loss of customers or a lack of relevant services or competitive pressures.

As I noted today in our press release, we have what our clients want and need, but they are simply not using our traditional services as much as they have in the past. The use of technology in the construction space is and will continue to affect our print-driven revenues. While there is no threat of print revenues completely disappearing anytime in the future, we will continue to feel the impact on our revenues until we are able to offset these secular challenges with some of our other initiatives we have discussed in the past.

Two of these initiatives are notable: one, the use of technology to differentiate our services, sustain and grow our market share, especially in the MPS and the archival business; and second, the increased use of color. As we discussed in our Q2 report, especially important is how we use technology to sell aggressively to a broader segment of the digital color market.

Both these businesses have the potential to help us offset the erosion or decline in our traditional revenues. Needless to say, we have been engaged in both MPS and the color business for a while now, but both these businesses are also evolving.

For example, while the MPS business in the construction space has been somewhat stagnant, there are emerging opportunities in the non-AEC space for MPS. We are exploring those opportunities very carefully. Similarly, in the broader segment of the digital color market, we have made significant inroads into a variety of retail, hospitality, healthcare and other verticals that have shown greater promise. We need to prove to our -- prove our capabilities with these high-profile customers, and during the past 3 months, we went a long way forward doing so.

Here again, our sales and marketing strategies are markedly different from the past. We are using tools such as our customized digital storefronts and driving sales through a variety of digital marketing channels.

On the imaging side, this includes things such as corporate team-building graphics, adaptable office decor, educational classrooms and common space messaging and HR and other company culture displays. These niche areas represent a growing market, while graphic applications are in high demand, and we are well positioned to supply them.

In essence, our pivot to color and nontraditional use of our print services will help expand our addressable market while the optimization of our sales marketing and workforce helps us make the most of what we already have. As we address the operational needs of the company, we also intend to better leverage our strong cash flows on behalf of our shareholders.

While we have been active buyers of ARC stock in the open market, since the second quarter we understand that our share price is under pressure. Therefore, we continue to explore ways to retain greater value to our shareholders, such as paying annual dividends or expanding our current share repurchase program by means other than open market purchases. We are in discussion with our lenders to determine if such options can be accommodated within our current facility or through other alternatives.

While this quarter's financial results challenged the company's performance, we are maintaining our annual forecast for 2019. We anticipate earnings per share to be in the range of $0.14 to $0.18. We expect annual cash provided by operating activities to be in the range of $45 million to $50 million, and annual adjusted EBITDA should be in the range of $49 million to $54 million.

With this as a brief backdrop, Dilo will now take a moment for an operational review of the quarter, followed by a brief financial update from Jorge, and then we will provide some time for Q&A. Dilo?

--------------------------------------------------------------------------------

Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [4]

--------------------------------------------------------------------------------

Thank you, Suri. While there continues to be demand for our printing services in nontraditional areas, the drop in printing services from construction and design companies increased year-over-year, and we see work from home builders dropping as well. By contrast, we have been able to secure new sales from our MPS business, including new clients from outside of the construction industry, and we continue to make progress with expansions and new location rollouts with our existing customers. Scan and archival services continue to appeal to our customers and our facilities' customers continue to show interest in our abilities to help them. Equipment and supply sales were affected by a drop in our Chinese joint venture, but the equipment business in the U.S. remains generally flat but healthy.

In addition to the cost savings we've achieved in the third quarter, we took steps to expand our business and build awareness in the market outside of our traditional channels. We marketed heavily in nonconstruction verticals with our new programs targeted towards health care, advertising and design agencies as well as sports and fitness franchises.

We used videos, highlighted successful and well-known customers and reached out aggressively with e-mail campaigns to qualified prospects. We recently revamped our website to leverage our experience from these marketing programs to increase our appeal to verticals beyond construction. We are not giving up on construction. It still provides us with strong sales in traditional print, but we are putting more focus on industries that have greater potential to use more and different kinds of print.

As Suri mentioned earlier, we made strategic changes in the company to align our operations with our level of sales. In addition to what he mentioned, we also closed 2 print locations in nonstrategic markets. As always, we are continuing to focus on the fundamentals of operations by maintaining good customer service, inventory control and strong cash collection.

With that, I'll turn the call over to Jorge. Jorge?

--------------------------------------------------------------------------------

Jorge Avalos, ARC Document Solutions, Inc. - CFO [5]

--------------------------------------------------------------------------------

Thanks, Dilo. Overall sales for the quarter declined 6.3% year-over-year, for reasons that were outlined earlier, including another double-digit drop in international equipment and supply sales as China's softened economy continues to suppress capital spending.

As a reminder, the China business is not strategic for us, and it's very low margin, but it did account for 2.6% of our sales drop during the quarter. Despite the drop in sales, we were able to maintain our strong gross margins due to cost controls we had in place prior to the third quarter and additional measures we took during the quarter. These cost-saving measures also contributed to the decline of SG&A of nearly $1 million and reduced the impact to EBITDA resulting from the decline in sales. It is worth noting that these measures produced a restructuring expense of just over $300,000 that appears on our income statement.

Cash flows from operations were $3.7 million higher year-over-year, primarily due to aggressive inventory management, improved AR collections as well as other changes in working capital. On a year-to-date basis, our aggressive cash management resulted in our cash flow from operations to be at par with prior year.

Our strong cash flows allowed us to pay down our senior debt by another $5 million during the quarter. Our bank debt is now less than $65 million and our leverage ratio, net of cash, remains under 2x. We also used a portion of our excess cash to repurchase approximately 200,000 shares during the quarter. Our continuing strong cash management performance and the significant reduction of our debt over the past several years is now providing us with the opportunities to explore returning value to our shareholders, as Suri described earlier.

I'll close with our normal reminders for those of you who are new to us or developing your own forecast. Our effective tax rate will be approximately 30% for the year as a result of the new tax law. Our historical operating losses of nearly $80 million remain at our disposal, and we'll keep our cash taxes well under $1 million for the foreseeable future.

In the first quarter's financial statement, you'll see a gross-up on our balance sheet of approximately $50 million as a result of the new accounting guidance for operating leases. This guidance had no material impact to the income statement or cash flows in that or subsequent quarters.

With that, I'll turn the call back to Suri. Suri?

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [6]

--------------------------------------------------------------------------------

Thank you, George. Holly, at this time, we'll be available to take our listeners' questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question is going to come from the line of Alan Weber, Robotti Advisors.

--------------------------------------------------------------------------------

Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [2]

--------------------------------------------------------------------------------

Can you just talk about -- you spoke about trying to do more business in some of your nontraditional channels. Can you just give like an actual example of what you're doing and like that?

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Sure. And we do this both in the MPS space and also the color space. So what we were doing is, I mean, not that we had not have nontraditional customers before, but we are increasingly focusing on these segments because we think there are great opportunities and probably less competition than in the construction space itself.

So for example, managed print services, we are looking at other large companies, companies, insurance companies or energy companies. There are companies who would be involved, say, for example, in government and state sector who would be providing services to variety of people in the government who require regulatory print. So we're looking at those opportunities and those -- and figuring out a way to tie our managed print services capabilities with our offset, what we call offsite printing, which will help us. So there is a huge amount of work opportunities that we can explore. We are doing that on the MPS side.

On the color side, we are looking at what used to be primarily driven by construction-related printing, now we are looking at retail, hospitality, healthcare. Like I said, there are classroom graphics and office -- corporate graphics and then motivational graphics, all kinds of different graphics. I mean you go to a gym today, there is no empty walls anymore. They are full of graphics, right? I mean whether you go to a gym or whether you go to a big store. In retail store, you will find, all of the store walls are filled with graphics. These are all new graphic opportunities we have, largely known as environmental printing, and this relates to either corporate culture or human resource or team building, any one of those efforts. So those are all new opportunities, and we are starting to market to that space.

--------------------------------------------------------------------------------

Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [4]

--------------------------------------------------------------------------------

Okay. So it was like on the MPS, is there any like I don't really mean a projection goal in terms of over the next year or 2 in terms of revenue, what you really hope to accomplish?

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

So MPS is a very interesting animal, and we've talked about this previously. MPS revenues comes to us in chunks. There are years we will do very well, depending on the number of contracts we sign. And then suddenly, a year or 2, we might really have very bad revenues. And this has been the case for us largely because most of our MPS revenues, the big ones, came from what you refer to as global customers in the construction space.

But as you know, in the last, especially 5-, 6-plus years, there have been lots of mergers and acquisitions in this space. So a customer we have, we might have had a long-term MPS contract with them, they get acquired by another customer who doesn't actually have us as their contractor. So we lose that customer.

On the other hand, there might be another acquisition in which there could be a new customer being added on to our existing contract. So because of that, it has been pretty tumultuous for us, especially the MPS revenues. I think it was in 2016 and '17, we had multiple mergers and acquisitions which worked against us negatively.

But in some years, we have good years where we have growth. So we feel good about the opportunities we have there. We are continuing to market them. And there are good years and bad years, but it is very hard to predict consistently as to how they will grow because of 2 reasons: one, number of contracts themselves, we might lose or gain; number two, no matter how big the customer is, if you sign them today, next year, there will be a decline in the revenues for MPS because those customers are all printing less. Use of technology is impacting that number.

So it's a fluid number, Alan. So we can't consistently predict those numbers. But in a good year, we largely maintain the previous year's MPS numbers and maybe add low single digits in terms of growth. On a very good year, that might be a little on the -- be on the higher side. On a bad year, we might lose a few digits in growth. So that's the range we are talking about. But we know constantly we are bringing in new customers. We are signing new contracts, but that also has to offset the decline in revenues and any mergers and acquisitions by which we could lose these customers.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question is going to come from the line of Walter Schenker, Maz Partners. (Operator Instructions)

--------------------------------------------------------------------------------

Walter M. Schenker, MAZ Capital Advisors, LLC - Principal [7]

--------------------------------------------------------------------------------

I have 2 questions, actually. The second one to be addressed, hopefully, is given the pressure on the stock in the last quarter, were you not -- why were you not able to buy back more stock?

But the other question is, the $10 million in cost savings, just a little bit more color. Those are largely cash costs. And therefore, all other things being equal, once that's all implemented, it should be incremental to operating profits on an annualized basis starting in the first quarter of next year? That's it.

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [8]

--------------------------------------------------------------------------------

Okay. So the first question, Walter, was on...

--------------------------------------------------------------------------------

David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [9]

--------------------------------------------------------------------------------

Why wouldn't you buy more shares?

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [10]

--------------------------------------------------------------------------------

Oh, why wouldn't you want buy back shares? Okay. That's a straightforward answer there, Walter, because we are restricted as to how much shares we can buy based on the liquidity in the market. So we could only buy up to a certain amount allowed by SEC depending on trading volumes we have. Am I not right, David?

--------------------------------------------------------------------------------

David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [11]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

So that's one -- that's the biggest limitation we had. Otherwise, we could have bought more shares. And that's the standard requirement there.

On the second side, with regard to cost savings, I will certainly ask Jorge to give you more color. But overall, if you look at it, about 60% of that is from cost of goods, COGS, and about 40% comes from G&A. So I mean that's the base number. I mean we won't give specific details, but roughly, that's what you're looking at.

Jorge, would you like to add some color?

--------------------------------------------------------------------------------

Jorge Avalos, ARC Document Solutions, Inc. - CFO [13]

--------------------------------------------------------------------------------

Yes, definitely. And to answer the question, I mean we make things where we were able to optimize different things as Suri mentioned in both the direct cost side as well as our SG&A costs, and we do anticipate those costs primarily dropping to the bottom line. I mean there might be some areas where it affects another part of the business, and you don't fully realize all the savings that you wanted. But all things being constant, biggest thing, obviously, revenue being constant and no blow-ups in other areas of the company, then you would expect that to just flow to the bottom line in 2020. Does that answer your question?

--------------------------------------------------------------------------------

Walter M. Schenker, MAZ Capital Advisors, LLC - Principal [14]

--------------------------------------------------------------------------------

And -- but be redundant, so these are actual costs as opposed to accounting costs, i.e., where you're amortizing something, which really is noncash and goodwill or anything like that?

--------------------------------------------------------------------------------

Jorge Avalos, ARC Document Solutions, Inc. - CFO [15]

--------------------------------------------------------------------------------

No. These are actual costs. These are actual costs coming out of the organization. And remember, we started this in the third quarter. So it's not like you can get a full $10 million year-over-year impact in 2020 because we're starting to realize some of those to a smaller degree in the third quarter, a little bigger degree in the fourth quarter, and then you'll get a full year impact next year.

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [16]

--------------------------------------------------------------------------------

And Walter, if it is anything related to accounting, adjustments or whatever, we'll call that out. We always do. But these are directly, which close down to the bottom line, which is meaningful to our shareholders and investors for now.

--------------------------------------------------------------------------------

Walter M. Schenker, MAZ Capital Advisors, LLC - Principal [17]

--------------------------------------------------------------------------------

Okay. Good luck trying to figure a better way to return cash to shareholders. Given the large cash flow, I think would make everybody pretty happy.

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [18]

--------------------------------------------------------------------------------

Absolutely. I mean we are definitely focused on that. As I said to you in my script, we are exploring all the options, and we are determined to make sure that we work towards that goal.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

(Operator Instructions) And we have a follow-up question from the line of Alan Weber with Robotti Advisors.

--------------------------------------------------------------------------------

Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [20]

--------------------------------------------------------------------------------

So just quickly, when you talk about the $10 million savings, excluding that, when you look into 2020, do you think you can keep cash flow relatively flat? Or kind of what do you think about -- how do you think about the cash flow for next year, excluding the $10 million savings?

--------------------------------------------------------------------------------

Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [21]

--------------------------------------------------------------------------------

Yes, again, a hard number to predict. Obviously, we can't quite project exactly what we'll do in 2020. If assuming it's a year like we did this year, again, in terms of revenue, Alan, then our objective would be to protect the cash flows. We've always done that very well year after year. That has been the trademark of ARC. So we'll certainly be focused on the cash flows, very much like what we did this year. But very hard to exactly predict what will happen in 2020 without really knowing what our revenues would be in 2020. Would you agree, Jorge?

--------------------------------------------------------------------------------

Jorge Avalos, ARC Document Solutions, Inc. - CFO [22]

--------------------------------------------------------------------------------

Yes. No. I would agree with that, Suri. And the way I look at it is saying, hey, that $10 million is ensuring that it protects us and make sure that our cash flow generation will stay at similar levels that we've seen 2019 and previously. Now hey, we're successful in some of the ventures Suri mentioned or Dilo mentioned on the sales side, well, then there's some upside there.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

At this time, we have no further questions. I'll turn the call back over to you for closing comments.

--------------------------------------------------------------------------------

David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [24]

--------------------------------------------------------------------------------

Thanks, Holly, and thank you, everyone, for joining us this evening. We appreciate your continued interest in the company. We look forward to talking with you again soon. Take care, and have a great night.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Once again, we'd like to thank you for participating in today's conference call. You may now disconnect.